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Personal loans explained

If you’re not sure which loan to go for, or even if a personal loan is the right solution for you, read on to learn more about loans and how our personal loan calculator can work for you.

What is a personal loan?

A personal loan, also known as an unsecured loan, allows you to borrow a certain amount of money in exchange for paying a certain amount of interest, which will be charged as long as it takes you to pay off the loan. Once you’ve taken out such a loan, you will need to make a set repayment every month for a period of time that is previously agreed upon with your lender.

As with any type of loan or credit card debt, you will have to repay not just the money you borrow, but also a rate of interest on top of that. The representative APR (i.e. annual percentage rate) is the rate that at least 51% of borrowers will be charged; the actual rate your lender offers you could be quite a bit higher, depending on your personal circumstances. The monthly repayment and total amount repayable listed alongside any personal loan example should therefore only be used as an indication of the minimum you will be asked to pay back.

You can use a personal loan for any number of things – to help pay for a car or other large purchase, to consolidate debts, or for some necessary home renovations, for instance. The main advantage of an unsecured loan over some kind of secured loan is that you won’t need to put up your house or car as collateral.

Unsecured loans also tend to come with lower interest rates than credit cards and allow you to borrow more than on cards. Most loans will furthermore offer a fixed APR and will set the repayments in advance, which means that you can be sure of how much you need to pay back each month, and plan accordingly.

There are, of course, some disadvantages to this. If your circumstances change, you won’t be able to change the amount you’re repaying to suit your new budget, which could stretch your finances and make it much harder to get out of debt. And while interest rates may be lower than those on credit cards, they can be higher than those on other types of loans – since you’re not putting up any form of collateral, lenders bear a bigger risk of non-repayment if you can’t keep up payments.

In the same vein, many unsecured loans will charge a penalty not just for missing a payment (or something going wrong with your monthly payment), but also if you want to pay off the loan early. This early repayment charge is why you should think twice if you’re planning to pay off your loan in bulk ahead of schedule.

Aside from these charges, some loans may require a set application fee. Also look out for other restrictions, as they may make a loan more expensive than it needs to be. Loans are regulated by the Financial Conduct Authority (FCA), so while some loans will naturally be more expensive than others, you can be sure that the lenders are properly vetted and you will be offered some assistance if you run into serious trouble.

Is it a good idea to get a personal loan?

Whether or not a loan is a good idea for you will depend on your personal circumstances and why you are looking to borrow several thousand pounds. If you’re not sure you can afford to make the same repayment every month and you only need a (few) thousand pounds, you could consider a credit card instead.

For sudden costs that you’ll be able to pay off after a month or two, a credit card or even an arranged overdraft on your bank account may be more suited than a personal loan, as it generally doesn’t matter when you pay these debts off, as long as you make a minimum monthly repayment. At the other end of the spectrum, large amounts of money may require a secured loan.

An unsecured loan really shines in the middle ground. It’s for an amount that is not too little but also not too large. You’ll be tied to it for several years, but you’ll also be sure that you clear your debt by the end of the term, provided you keep up with your repayments.

One good reason to take out a bank loan is to consolidate debt, especially if you’ve got debts across a few different sources, such as your current account overdraft as well as a few credit cards. By using a personal loan instead of yet another credit card to consolidate your debts, you not only fix the interest rate – which will likely be lower than credit card interest rates – but also the term, giving you peace of mind that as long as you keep up with repayments, you’ll be debt-free by the end of it.

Loans have the added advantage of not tempting you to spend more, with a credit card typically allowing you to keep using it until you hit your credit limit. A loan will therefore make it hard for you to get into any additional debt, as long as you put all your debt on it and cut up and cancel all your cards.

Before you decide on a personal loan, for whatever purpose, it’s always a good idea to check your credit score. While a low credit rating won’t necessarily prevent you from taking out a loan, it could mean that you’ll be less likely to get the representative APR, so take that into account when you do your calculations to see if you can afford a loan.

How do I compare loans?

If you’ve decided you need a loan, your next step is to see which loan would be best for you. Since any loan application will require a credit check, and multiple credit checks will lower your credit score – which in turn will make it less likely you’ll be offered the representative APR – you’ll want to compare personal loans carefully before applying for one, to make sure you stand the best possible chance of being accepted and reduce the risk of lowering your score.

The personal loan calculator above allows you to specify the loan amount and term that you are looking for. While you will have to pay more interest when you pick a longer loan term, your monthly repayments will be lower. You will have to decide for yourself what you’re comfortable setting aside each month to repay your loan, but it would be wise to budget in a buffer, in case of unexpected changes to your situation.

Aside from the main sliders, you are able to refine your search with a few criteria, which can give you more or less flexibility. Once you’re happy with the criteria you’ve set, you can still choose to order the loans by the total amount repayable (so your loan plus the total interest) or the monthly repayment, depending on what’s more important to you. Again, remember that this quoted amount won’t necessarily be what the lender offers you.

Once you’ve checked the ‘Details’ to see if a lender’s product features are acceptable to you, you can click the green button, where one is available, to go to the lender’s site to apply. (Note that we get a bit of money from the lenders with green buttons if you apply for a loan with them via our website, but that we will always show you all available loans for your criteria, with or without a green apply button.)

If you’d prefer an expert loan comparison, you could have a look at our Best Buys, which feature the best loans for those looking to borrow £5,000 over three years, £7,500 over five years or £10,000 over five years. These charts will naturally be unable to take your personal circumstances into account, so may not be your best option if you have bad credit.

Loan tips

Always check your credit score before applying for a loan, and do whatever you can to improve it so that you will stand the best chance of being approved for the rate you want.

In a similar vein, you should try to avoid applying for multiple loans at the same time, as this will lower your credit rating. If you want to know what you’ll need to pay back, you can request a loan quote before you complete an application.

Aside from eligibility requirements and potential flexibilities (like repayment holidays), the only thing that really differentiates personal loans is their APR. Don’t be tempted to go with a provider just because they have a familiar name – finding the best loan rates should be your top priority.

Make a budget so you know exactly how much you need to pay and how much you can afford to pay off every month. Keep in mind that there may be some charges attached to the loan, so you might want to borrow a little bit more than strictly necessary to cover these extra costs.

Check the small print before you agree to a loan.

Check to see if your loan provider allows overpayments. While these won’t affect your monthly repayments, they will decrease the number of months it will take you to repay the loan, which will reduce the amount of overall interest you end up paying. Do be careful if your lender charges an early repayment charge, as this could affect how much you’d save by overpaying.

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